The Norwegian Financial Supervisory Authority (Finanstilsynet) published an inspection report on SpareBank 1 SMN’s use of the internal ratings-based (IRB) method for capital requirements, covering the use of the IRB system in credit granting and risk management as well as the bank’s validation work. Finanstilsynet concludes that the bank’s use of IRB information in retail (personal market) lending decisions appears inadequate and will follow up the bank’s further development of its credit decision framework, maturity assessments and refinancing risk. In retail credit decision documentation, Finanstilsynet found that loss given default (LGD) is not included and that probability of default (PD) is used at a relatively aggregated level, even though IRB information is expected to be integrated into decision-making and board reporting. The supervisor expects further development of the decision framework for the retail segment and wants LGD distribution information, not only averages, to be reflected in reporting to the board and management. The report also highlights risks of underestimating capital requirements where contractual maturity is shorter than the effective risk horizon, including for balloon loans with refinancing risk, and clarifies that the bank may set the maturity parameter to the longest period the borrower is assumed to have to fulfil obligations (capped at five years) under CRR Article 162(2f), even if the European Banking Authority’s Q&A means the bank cannot be compelled to do so. If the maturity parameter used in risk-weight calculations does not reflect actual risk, the shortfall may need to be addressed in Pillar 2 capital needs. Finanstilsynet will follow up maturity parameter practices across IRB banks as a separate matter. It will also follow up the bank’s validation of default identification data and expects the bank’s collateral valuation governance and validation of property value estimates to include explicit criteria for model accuracy and suitability and to align with CRR Article 181(1); the bank has also signalled it will apply for changes to retail IRB models.
Norwegian Finanstilsynet 2026-01-05
Norwegian Financial Supervisory Authority flags deficiencies in SpareBank 1 SMN’s use of IRB models for retail credit approvals
The Norwegian Financial Supervisory Authority (Finanstilsynet) reported inadequacies in SpareBank 1 SMN's use of the internal ratings-based (IRB) method for retail lending. It calls for better integration of IRB information, including loss given default (LGD) and probability of default (PD), into credit decisions and board reporting. Finanstilsynet will monitor the bank's maturity parameter practices and validation of default data, stressing accurate collateral valuation and regulatory alignment.